SingTel – CIMB

Bharti’s 4QFY08 results beats expectations

Above expectations. Bharti’s (SingTel’s associate, 30.5% stake) 4QFY08 earnings of Rs18.5bn (+37% yoy) beat consensus expectations by 5%. Full year FY08 earnings of Rs67.0 bn (+57% yoy) was 2.2% ahead of consensus. Key positive for this set of results was robust mobile subscriber growth (+67% yoy) which more than offset the ARPU decline (-12% yoy, flat qoq) as Bharti pursued first-time mobile subscribers in rural India. Group EBITDA margin for 4QFY08 held steady yoy. It should be noted that the 360bps yoy EBITDA margin slippage for mobile operations was primarily (approx 90%) due to the de-merger of passive infrastructure effectively converts passive infrastructure capex for mobile operations into opex.

Continues to pull ahead of rivals. Bharti extended its subscriber market leadership with a 23.8% (+140 bps yoy) share, bringing its mobile subscriber base close to 62m. Bharti’s subscriber market share is now ahead of Reliance and Vodafone by 6.4% pts and 6.9% pts respectively. The push to rural areas has been rewarded as rural subs now constitute 25% of overall customer base and 36-37% of net adds.

Passive infrastructure de-merger. Bharti hived off its passive infrastructure assets into its subsidiary, Bharti Infratel with effect from Jan 31, 2008. Bharti Infratel has over 52k towers, out of which 30k are transferred out into Indus Towers (a JV between Bharti Infratel, Vodafone & Idea Cellular) for 16 circles. Bhart Infratel owns 42% of Indus Towers. Bharti Infratel recorded a maiden two-month revenue contribution of Rs6.0bn and EBITDA margins of 37.1% on a 1.22x sharing factor.

Regulatory updates. Bharti has been granted additional spectrum in 6 of the 13 circles it is eligible in which is highly positive for the firm. Apart from that, the ADC charge removal and possible removal of AGR and USO fees is also positive as it would make services more affordable.

Comments

This set of results does not raise any key concerns over Bharti’s growth prospects in the near term. Instead, Bharti’s sustained market share gains over its key rivals, Vodafone and Reliance continues to highlight its unrivalled advantages in branding, distribution network and economies of scale. We believe that this positions Bharti to be the most likely winner with the rise of tower-sharing in India. Tower-sharing results in network infrastructure cost and coverage becoming common denominators in the competitive landscape, leaving branding, distribution network and economies scale as the key sources of competitive advantage.

No change to our earnings estimates and view that Bharti is the most reliable growth driver at SingTel. We are expecting Bharti to contribute 20% of SingTel’s pre-tax profits in FY09, up from 17% in FY08.

Valuation and recommendation

Maintain Outperform with unchanged sum-of-parts valuation of S$4.45. SingTel remains attractive for its reliable associates-led earnings growth following Bharti’s strong results and growth outlook. We also continue to like SingTel for strong prospects of attractive dividend announcement (CIMB est: 16 cts/share, 4.2% yield) in the upcoming results announcement on May 14. The key risk at SingTel lies with earnings delivery at Telkomsel which is facing increased competition on the back of aggressive price cuts by Excelcomindo.

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